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How I’d invest £5k in a Stocks and Shares ISA to profit from a FTSE 100 recovery

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Investing in FTSE 100 companies through a Stocks and Shares ISA could allow you profit from a long-term recovery in equity prices. This prospect may seem unlikely at the present time, and could take many years to materialise. But the FTSE 100’s track record shows it has always been able to return to previous highs, after even the very worst bear markets.

Therefore, investing £5k, or any other amount, in a diverse range of financially-sound businesses for the long term could be a worthwhile move. It may mean you take advantage of low share prices today to generate high returns in your Stocks and Shares ISA over the coming years.

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Financial strength

Perhaps the most important area to consider when investing in any company at the present time is the prospect of survival during what is an unprecedented period for the world economy. Ultimately, nobody knows how long the current lockdown will last. No one knows whether there’ll be a second wave of coronavirus. Or how great the impact of the current difficulties will be on the economy.

As such, ensuring that your holdings have the financial strength to overcome short-term challenges is a priority for any investor. For example, buying companies with large cash positions and low debts could reduce overall risks. Likewise, some companies may not be as affected by a lockdown as others. That could make them relatively attractive. So by buying companies with lower risks, albeit at potentially higher prices, you could improve your overall risk/reward ratio.

Diversification

Due to the uncertain economic outlook, diversifying across a number of different companies is a sound move. Diversification reduces your company-specific risk. It also means you’re less reliant on a small number of businesses to produce your returns.

The impact of coronavirus is likely to differ between countries and sectors. Therefore, ensuring you have exposure within your portfolio to a varied range of industries and businesses that operate in different geographies could be a shrewd move. It may not only reduce your risks, but also improve your returns as you’re better placed to capitalise on the FTSE 100’s recovery.

Quick returns

Aiming to make a quick return from FTSE 100 shares at the present time may not be a good idea. As mentioned, the index could move sharply upwards or downwards in the near term, depending on news regarding coronavirus.

However, over the long term, it’s very likely to deliver a successful recovery. Therefore, it may be a good idea to adopt a long-term focus when it comes to buying stocks in your ISA. This may mean you buy companies with wide economic moats. Or those that have a solid track record of outperforming their peers during tough economic periods.

Such companies may not be among the cheapest in the index, but they may produce the highest returns over the coming years.

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Peter Stephens has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

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